IR35 changes announced by HMRC will have a significant impact on many contractors and their staffing agency. Here we’ve set out some common questions to cut through the IR35 noise.
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What is IR35?
HMRC IR35 legislation is designed to prevent tax avoidance by assessing whether contractors are genuine contractors, or so-called "disguised employees". HMRC believes 'disguised employees' using an intermediary (like a contractor’s limited company), should be paying income tax and National Insurance (NI).
If the contractor would have ordinarily been an employee if the intermediary was not involved, the legislation ensures they pay roughly the same amount of tax as an employee would.
What will change in IR35 in 2021?
At the moment, on Private-sector contracts at least, contractors are responsible for determining their own IR35 status, and they are liable for any unpaid tax and NICs if they get it wrong. Agencies and their end-user clients have no involvement in the contractors’ tax affairs, except maybe to offer advice or refer them to experts like Payme.
But from April 2021, the end-user client will be responsible for determining the status of any contractors they engage either directly or through agencies, unless they are deemed by HMRC to be a small company.
If the end-user client determines a contractor is ‘inside IR35’, the fee payer (usually the Agency) will have to deduct PAYE tax and NICs from the contract rate, before paying the contractor’s Limited company.
HMRC has stated that IR35 itself is not changing, and contractors who are genuinely ‘outside’ before the reform will still be ‘outside’ after it. The difference is that the client, and not the contractor, has to decide what the correct status is.
What’s a “blanket decision?”
When similar reform hit the Public sector in 2017, many Public-sector bodies automatically assigned the same IR35 status to all contractors in a particular role, without completing individual assessments for each contractor. These "blanket" or "role-based" decisions did not comply with the legislation's requirement that "reasonable care" be taken in determining IR35 status.
As it was perceived to the least risky option, most blanket decisions placed all contractors ‘inside IR35’, which unnecessarily increased the cost of hiring contractors, while significantly reducing their pay. This, in turn, led to staffing problems across the Public-sector.
Am I inside or outside IR35?
From a contractor's point of view, we'd advise that individual assessments are necessary and that they should speak to the client if they believe blanket decisions are being applied. It’s also important that Private-sector end-user clients understand that blanket decisions are not a viable solution if they want to access the skills they need at a sensible cost.
Do I have to use HMRC’s CEST?
Check Employment Status for Tax (CEST) is HMRC’s online tool for determining IR35 status, and it’s been widely criticised for giving incorrect results.
With this in mind, we'd always advise that contractors seek advice from IR35 compliance experts, who can assess their current situation and help them implement the necessary processes to control their risks and costs without disrupting their supply chain.
How often should my IR35 status be assessed?
As a minimum, IR35 status should be assessed for each new contract or extension. It's usually better, from the point of helping the contractor remain outside IR35 if they're contracted for a particular piece of work, or a finite length of time, rather than having a rolling contract.
Can contractors challenge IR35 decisions?
Absolutely. If you feel the end-client has ‘blanket’ assessed you and is incorrect in their decision, you have every right to appeal. Contractors can challenge the result through the ‘Client-Led Disagreement Process.’
In the view of IR35 experts, all contracts should be reviewed on an individual basis and based solely on the clauses and working practices.
Inside IR35 versus outside IR35
What does outside IR35 mean?
Contractors operating 'outside IR35' can pay themselves marginally more tax efficiently, usually through a combination of salary and dividends. In simple terms, end-user clients pay the contractor who will maintain responsibility for their taxes, just like any other small business owner.
What does inside IR35 mean?
When a contractor is considered inside IR35 legislation, all their income is classified as employment income and is subject to PAYE, NIC and interest which is deducted at source, usually through an IR35 umbrella company.
We’d advise contractors to seek advice, get written terms and conditions and review their working practices regularly.
How IR35 affects contractors:
If I’m a contractor today in the private sector, I will have spent many years perhaps determining my own employment status for tax, but from April 2021 IR35 determination will be made by my end-user client by my hirer. I need to ensure that my end client my hirer, and my Agency are doing the right thing to manage this legislation properly.
How IR35 affects staffing agencies:
If I’m an agency, I’ll have obligations around perhaps how I pay the contractor that I have engaged, and I need to ensure that the contractor and my end-user clients understand the legislation. In particular, that the end-user client is managing the process properly and fairly, and with what HMRC calls ‘reasonable care’.
How IR35 affects end-user clients and companies:
If I’m an end-user client employing contractors, I need to understand what IR35 says and means, what the ‘Off-Payroll Working’ rules say and mean. I’d want to put in place processes and policies to make sure that I manage this legislation properly and apply it fairly and with reasonable care.